A potential real estate deal, such as a debt or equity transaction associated with a portfolio of commercial properties, is typically structured by a deal originator who works in the field with a customer. The deal originator may work with the customer, for example, to establish an appropriate size (e.g., an amount of money associated with the deal) and term (e.g., a number of years associated with the deal) for the potential deal. Because different deals can be associated with different risk characteristics, the potential deal may also be associated with a “return target,” such as a minimum loan spread that will be required in order for that particular deal to be approved (e.g., based on the particular risk characteristics associated with that deal). For example, a potential deal with a substantial amount of risk would require a higher return target as compared to another potential deal with a lower amount of risk.
The return target for a potential deal is usually not determined by the deal originator, especially when the deal is associated with a large commercial transaction. Instead, the return target is may be determined by a chief risk manager (or even a risk committee) who reviews and approves transaction from a number of deal originators. For example, a deal originator may indicate the size and term of a potential deal to a risk manager along with a description of a collateral type (e.g., illustrating that the deal is associated with high quality retail properties) and a loan-to-value ratio. Based on this information, the risk manager determines the minimum loan spread that will be required in order for the deal to be approved.
Although such an approach can provide control over deal risks and returns, the review of a potential real estate transaction can take a considerable amount of time (especially when hundreds of potential deals are being considered). As a result, deal originators and customers can become impatient with the process. In addition, the parties can become frustrated if an ultimate decision (e.g., a loan spread that is required for a particular real estate deal) is not provided until after substantial time and effort have been expended.
Moreover, the approach can seem inconsistent to deal originators and customers who may not fully understand the decision-making criteria. For example, the approach might include, or might appear to include, subjective “gut-feel” risk assessments made by risk managers or committees. In addition to confusing customers, subjective assessments can lead to errors in decisions made by risk managers and/or committees.